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For the people who are earning a decent salary in the UK, they usually notice a large jump in the tax bill. In such scenarios, it happens because they have crossed a 40% tax bracket. MMBA Accountants can help you in to calculate your tax and minimise the liability. This guide will breakdown how the tax brackets work. Moreover, it also discusses what you can do to manage your income tax efficiently.
Table of Contents
What is the 40% Tax Bracket?
The 40 tax bracket applies to individuals who have an annual income greater than £50,270. This applies to both salaried employees and the self-employed individuals. However, this includes income from other sources like rental properties, dividends, or investments.
For example, if you earn £60,000, your income tax will be calculated as:
First £12,570: tax-free (personal allowance)
Next £37,700: taxed at 20% (basic rate)
Remaining £9,730: taxed at 40% (higher rate)
You won’t pay 40% on your entire income, just on only the portion that exceeds £50,270. Your tax code decides how much income is tax-free and what falls into the 40% tax bracket. Check full guide on tax codes to see what your code means.
Income Tax and Taxable Income
“How much tax will I pay?” is one of the most common questions. The amount you pay depends on:
- Your income tax band
- Your total income
You can use an income tax calculator to get a fairly accurate picture of your tax liability. Your tax code also affects how much income tax is deducted from your salary.
Taxable Income and How to Calculate it?
Taxable income is the amount of your pre-tax income that’s subject to income tax. It includes:
- Earnings from employment
- Self-employment income
- Dividend income
- Savings and rental income
You can claim tax relief on things like pension contributions, charitable donations, and certain business expenses. But these are the expenses which reduces your taxable income.
Tax Rates and Brackets
The UK Income Tax Rates for the Current Tax Year are below. For the 2024/25 tax year, here’s how the UK income tax rates look:
- 0% on income up to £12,570 (standard personal allowance)
- 20% (basic rate) on income between £12,571 and £50,270
- 40% (higher rate) on income between £50,271 and £125,140
- 45% (additional rate) on income over £125,140
These rates do not include National Insurance, which is an additional deduction.
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How Do Tax Brackets Work?
The tax system is progressive, meaning higher income is taxed at higher rates, but only the portion that falls in each band. These are called marginal tax rates, not flat rates.
Let’s say your total income is £130,000. You’ll pay:
- 20% on one portion
- 40% on another
- 45% on the top slice over £125,140
Personal Allowance and Tax Relief
The personal allowance allows you to earn £12,570 tax-free in case if your annual income is under £100,000. One way to reduce your taxable income is through salary sacrifice. This can help you stay in a lower tax bracket.
But if you earn more than £100,000, then your allowance is reduced by £1 for every £2 that you earn above this threshold. By the time your income reaches £125,140, at that point your personal allowance is gone.
This creates an effective 60% tax rate on income between £100,000 and £125,140 when you factor in the loss of the personal allowance.
What Other Tax Allowances and Deductions Am I Eligible For?
You can reduce your tax bill by using:
- Marriage allowance (this is applicable if your partner earns less)
- Charitable contributions (Gift Aid Scheme)
- Pension payments (tax-deductible)
- Childcare vouchers
To claim Gift Aid, your donation must be a voluntary donation from a UK taxpayer. It should not be in exchange for goods or services. Cash donations, one-offs, standing orders, and even text donations may qualify.
Donations to community amateur sports clubs (CASCs), charity shops (on sales over £1,000), and via charity events may qualify, but it depends on the setup.
Certain tax reliefs depending on your occupation
These tax reliefs help bring down your income payable. However, sometimes they even pull you out of a higher income tax band.
Managing Your Finances in the 40% Tax Bracket
There are many ways in which you can minimise your tax liability If you’ve entered the higher rate tax bracket, don’t panic. Here are tax-efficient ways to reduce your tax liability:
- Pension contributions: These reduce your taxable income and attract tax relief.
- Charitable donations: Claim Gift Aid to reduce your bill.
- Salary sacrifice schemes: Exchange part of your salary for non-cash benefits.
- Make tax-free investments using ISAs, which grow free of tax.
- Dividend income and savings interest may have separate allowances.
What Are Some Tax-Efficient Ways to Pay Myself?
For business owners, it’s possible to structure your income tax efficiently:
- Form a limited company
- Pay yourself a small salary and take the rest as dividends
- Use pension payments and benefits-in-kind
- It’s smart to use a tax calculator to ensure your strategy stays within legal bounds and tax laws.
Capital Gains Tax and Inheritance Tax
Capital gains tax (CGT) is charged on the profit from selling assets like stocks, shares, or a second home. It’s separate from income tax but often applies alongside it.
If you’re in the 40% tax bracket, your CGT rate on residential property could be 28%, while on other assets it’s usually 20%. You get an annual CGT exemption of £3,000 for 2024/25.
How Does Inheritance Tax Relate to the 40% Tax Bracket?
Inheritance tax (IHT) kicks in on estates worth more than £325,000. The rate is 40% on anything above that.
You can reduce IHT by:
- Passing on pension wealth
- Using the residence nil-rate band
- Leave some money to charity
- Like with income tax, it’s smart to seek professional advice for IHT planning.
- By seeking Professional Help
How Can an Accountant Help Me With My Tax Bill?
It is difficult to deal with the higher rate tax band. A qualified accountant can:
- Prepare your tax return
- By claiming all eligible reliefs
- Help reduce your tax liability
- Guide on tax-efficient investments
What Services Do Accountants Offer for the 40% Tax Bracket?
Professional accountants offer:
- Tax planning
- Income structuring
- Dividends and PAYE management
- Capital gains and inheritance planning
If your annual income exceeds £50,000, you’re likely paying more tax than you need to—get advice before your next annual budget review. If your income is high, you might also need offshore tax advice to plan better and pay only what you must.
Staying Up-to-Date With Tax Changes
The UK tax system evolves with every new budget announcement. This includes income tax rates, tax-free allowances, and reliefs often shift.
Recent changes:
- Freeze on personal allowance until 2028
- Reduced CGT exemptions
- Tweaks in dividend tax bands
How Can I Stay Informed About Tax Changes?
To keep ahead of the game
- Subscribe to HMRC updates
- Follow tax blogs and accountants on social media
- Attend seminars and webinars
- Speak to a financial advisor
Conclusion
If your income falls beyond the basic rate income level through a job, own business, or savings and dividend income then you may enter the 40% tax bracket, where you pay tax on only the amount above the threshold. For that reasons, understanding marginal tax rates and standard personal allowance rules is key. By using individual savings accounts, making tax-free investments, or adding additional pension contributions, you can access tax-free allowances and achieve tax reduction across the additional income bands.
Frequently Asked Questions
How much can I earn before I pay 40% tax?
You can earn up to £50,270 before hitting the 40% tax rate in 2024/25.
What is the 40% tax bracket in 2024?
It’s the higher rate band, applying to income between £50,271 and £125,140.
How to avoid paying 40% tax?
Use pension contributions, charity donations, and salary sacrifice to bring your income below the threshold.
Is the 40% tax threshold changing?
It’s currently frozen at £50,270 until at least 2028.
Where does the 40% tax threshold start?
At £50,271, based on the current UK income tax band for 2024/25.
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